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A firm currently offers credit terms of 2/10,n/30. You want to change the credit policy to 2/10, n/40. As a result of this change, sales
A firm currently offers credit terms of 2/10,n/30. You want to change the credit policy to 2/10, n/40. As a result of this change, sales are expected to rise by 12%, bad debts will rise from 2% to 4%. All sales are credit sales. Currently 43% of customers pay off their accounts on day 10, with 55% paying on 30 days, and 2% paying on day 100. The change will result in 42% paying on day 10,54% paying on day 40, and 4% paying on day 100. Assume: 365 day year, COGS, and operating expenses other than bad debt expense, are calculated as a percentage of sales. The current percentage will not be affected by the credit policy change. Interest expense will remain constant Taxes are at the 40% level Income Statement before credit change Sales $1,100,000 COGS 550.000 Gross Profit 550,000 Bad debts expense 22,000 Operating expenses 300,000 EBIT 228.000 Interest expense 10,000 218,000 Taxes 87,200 Net Profit $ 130,800 Balance Sheet Before change Cash $100,000 Accounts Receivable 100,055 Inventory 400,000 a. Calculate the new average collection period
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